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Managing finances is a big part of running a firm. Likewise, knowing when you can make withdrawals is something all business owners need to be clear about. This is because there are rules governing how you’re allowed to access your business bank account, and company directors ignore them at their peril. 

What is a business bank account?

Not every company owner has a business bank account. Many sole traders just use personal accounts, but while this may work for a small firm with relatively straightforward accounts, dedicated business bank accounts come with a number of benefits that could be worth considering, including:

• The ability to upload receipts to the account, to aid with transparency

• Integrated invoice tools, which create a template, and maintain a record of any invoices issued

• Accounting software packages, which can help with working out tax and National Insurance contributions

• Tax helplines

• Option to upgrade to a superior account as your business grows

• Business insurance 

• Easier access to business loans

• Opportunity to boost your business credit rating

• Offering a more professional image

Can I take money out of my business bank account?

When we talk about taking money from a business account, we’re not referring to paying for goods, parts or services vital to the firm's smooth operation. We don’t mean paying salaries and taxes, either. We’re talking about when you make withdrawals from a business account for personal reasons. You’re allowed to do this, but only if you follow certain guidelines. What you can take out and why depends on whether you’re a sole trader or a limited company. 

Taking money from a business account as a sole trader

There’s no legal requirement to have a business account if you’re a sole trader, but many small firms choose to open a business account because of the various benefits on offer and because it helps with business loan applications. It also makes it easier to separate business and personal finances.

That said, if you’re well organised there’s no issue with keeping all your finances together in a personal bank account. After all, as a sole trader, any money coming into the account is yours once you have paid your tax and National Insurance contributions. 

Taking money from a business account as a limited company

A limited company is classified as a legal entity in its own right. It’s distinct from its directors, which means all financial records and dealings must be kept separate from any personal banking. The simplest way to do this is to have a business bank account. 

Typically, banks will insist you open a business account if you run a limited company. This is partly because limited companies need to submit detailed accounts, showing and explaining all transactions to Companies House each year. 

When can you take money out of your limited company business account?

If you’re operating a limited company, there are four main reasons for taking money out of your business account and placing it in your personal account. These are:

• Paying yourself a salary. It’s recommended that business owners draw a regular salary, after deducting income tax, National Insurance and Employer’s National Insurance contributions 

• Taking a director’s loan. You should aim to repay the loan before the end of the financial year, otherwise you’ll face an additional tax charge, known as an S455, on any outstanding balance

• Issuing dividend payments. You should only pay dividends from profits based on the proportion of the business each shareholder owns (i.e. shares held)

• Claiming business expenses. Ideally, all expenses will be paid for with the business account bank card. But using a personal card is permitted so that you have a backup if, for example, your business card isn’t accepted

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Receipts should be retained, even if you’ve paid for items with your personal account and transferred money from your business account to cover the cost.  

Is it illegal to transfer money from a business account to a personal account?

You can withdraw money from a business account, provided you keep accurate records and repay the amount as soon as possible.

If you don’t keep accurate records, HMRC may treat any money not repaid as income, meaning it’s subject to tax and National Insurance. 

Note: Failing to keep an accurate record of all withdrawals for personal expenses and not declaring these sums to HMRC should be avoided. Should the withdrawals come to light, it will result in a fine and could even be considered fraud.

When can’t I take money out of my business account?

Aside from withdrawals for personal use where no records are maintained, you must be careful when paying dividends to any shareholders you may have. The maximum amount you can pay out in dividends is limited to available profits from the current and previous financial years. 

To comply with tax rules, you must hold a directors’ meeting to ‘declare’ dividends when these are paid from a business account. You should also keep minutes of the meeting, even if you’re the only director present. This is particular important where a business has multiple directors.

What are the risks of taking money out of a business account?

The biggest risk associated with taking money out of a business bank account is that it may leave you without enough cash to run your business. This includes paying staff (including yourself) and suppliers, settling your taxes and National Insurance contributions, and repaying any money borrowed from the account. 

Always keep money aside to cover unexpected costs, such as a rise in premises rent or the loss of a work contract. This could be kept in a separate business account so you don’t accidentally spend it.

It may be tempting to rely on your business bank account’s overdraft to bail out your business in these circumstances. But this facility is only intended as a short-term solution to protect you from unexpected expenses and a cash shortfall. 

Can I have more than one business bank account?

You can have as many business bank accounts as you need to run your company effectively. For example, you may want an account into which you put money that’s earmarked for business expenses, or to pay tax and National Insurance contributions. 

The latter might be a simple business account without an overdraft. The other account, which you’d use for regular and occasional transactions, could come with invoicing and business management tools and apps.